Despite all the perks that come along with being a freelancer, paying taxes can quickly make you want to crawl back into the arms of a traditional employer. But, before you launch into complete panic mode, work through this tax planning checklist to prepare yourself for paying Uncle Sam.
1. Put 30 percent of your paycheck in savings.
Tax time is often synonymous with refunds, but that isn’t always the case for a freelancer. Since you’ve received payments from clients all year without any taxes taken out, it’s now time to give some of that money to the IRS.
To prepare yourself for tax season, it’s in your best interest to tuck away at least 30 percent of each paycheck into a savings account to pay your taxes. This will help you avoid the need to raid your emergency savings fund because you neglected to save up to pay Uncle Sam.
2. Know the filing deadlines to pay quarterly estimated taxes.
Freelancers don’t only need to pay attention to the tax filing deadline. There are three other tax due dates throughout the year to mark on your calendar. These dates are known as the deadlines to make quarterly estimated tax payments.
The IRS requires estimated tax to be paid on any income that does not have income tax withheld. The filing dates are typically: April 15, June 15, September 15 and January 15 – but can fluctuate if those dates fall on a weekend. For example, the filing date for September 1 to December 31 earnings of 2016 is actually January 17, 2017.
Failure to pay quarterly taxes could result in an underpayment penalty assess by the IRS at the end of the year when you file your annual return. Don’t forget this step during your tax planning.
3. Gather all your 1099s.
Even if you file quarterly estimated taxes, it’s important to hang on to the 1099s that arrive in your mailbox come January. The 1099-MISC is similar to Form W-2 but is designed for those who are self-employed and receive payment from a client for specific goods or services.
For example, contractors, independent consultants, writers, graphic designers and musicians are just a few of the professions that should receive a 1099-MISC each year. The IRS also gets a copy to make sure you’re paying your fair share.
4. Figure out your deductions for better tax planning.
When filing your taxes, you may be surprised by all the options for deductions. Deductions help reduce your tax liability, thus freeing up more money to reinvest in your business.
Common deductions include home office space (even if you’re a renter), business travel expenses and contributing to a retirement plan. Be sure to do your research while tax planning, and keep receipts throughout the year, so you can deduct the accurate amount on your return.
5. File a Schedule C.
Just like the traditionally employed, you need to file your annual tax return in April (the exact date often fluctuates). For tax year 2017, the tax filing deadline is April 17, 2018. Always file a return even if you paid estimated taxes each quarter.
Schedule C is an IRS tax form that reports income or loss from a business you operated. While you aren’t always required to file this form for tax purposes, it’s a great way to analyze your business finances from the year. The form also factors in all your deductions, so you’ll pay taxes on your profit and not your gross income.
Additionally, you can’t operate a business at a loss forever. If you experience a loss year after year, eventually the IRS will insist your employment isn’t a job. Instead they’ll classify it as a hobby. When that happens, you can no longer take the deductions. Completing a Schedule C will help you better understand the success (or failure) of your business.
6. File a Schedule SE.
Along with income taxes, the IRS also requires you to pay Social Security or Medicare taxes as a self-employed individual. Together, that tax is called “self-employment tax”.
If you earn $400 or more of net profit, determine the tax due on your earnings by filing a Schedule SE, Self Employment Tax.
7. Know these two things.
- You still have to pay quarterly taxes if you have a full-time job.
It’s easy to assume you can get out of paying quarterly estimated taxes on side hustle income if you’re already paying taxes from a traditional job. But, you’d be wrong.
You still need to file quarterly estimated taxes on all additional income. Otherwise, brace yourself for a big tax bill and potentially a penalty come April.
- You’re likely part of the gig economy without realizing it.
Perhaps you don’t have a full-blown side job, but you’re still earning money by selling your belongings on eBay or renting out a spare room in your home on Airbnb. That still counts as taxable income. And you must treat it as such.
However, there is a small tax loophole for renting out a room in your primary residence. Any room only rented out for 14 days or less doesn’t trigger the need to pay taxes on the income.
8. Always save.
The first and last points to good tax planning are to save your money. You never want to get to tax season and realize you owe the IRS without any money in the bank to pay up. Get in the habit of saving at least 30 percent of all income, no matter how it’s coming in.